Fed plans to stop buying bonds

Washington The US Federal Reserve plans to stop adding to its bond ­holdings in October, in a sign of its ­confidence the US economy is gaining strength even as the central bank ­gradually withdraws its support.

The decision, described in an account of the Fed’s most recent policymaking meeting in June, signals the end of one of the central bank’s most aggressive efforts to stimulate the US economy. The Fed, which began reducing its monthly purchases in January, plans to add a final $US100 billion ($106 billion) to its holdings of Treasuries and mortgage-backed securities over the next four months, for a total of $US1.5 trillion.

But the account underscored that many Fed officials remained guarded in their optimism about the economy. It also suggested they had not decided when to take an even more important step in their retreat: raising short-term interest rates for the first time since December 2008. Investors expect the Fed to start raising interest rates next year. The Fed said the decision to end bond purchases in October, rather than continuing purchases at a nominal level until the end of the year, should not be interpreted as evidence that rate increases were likely to begin sooner.

“Most participants viewed this as a technical issue with no substantive macro-economic consequences and no consequences for the eventual decision about the timing of the first increase in the federal funds rate," the minutes said, referring to the benchmark rate the Fed uses to influence borrowing costs for consumers and businesses.

Pace of retreat up for debate

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Fed officials disagree about the pace of retreat in large part because they disagree about how much more monetary policy can accomplish. Five years after the Great Recession, the share of adults with jobs has barely recovered, inflation remains below the level the Fed regards as healthy, and economic output remains weak. Officials are convinced some of this damage is permanent – or that it cannot be fixed by holding down borrowing costs – but they differ on the depth of the damage. At the June meeting of Federal Open Market Committee, they debated why the housing market weakened over the last year, whether sidelined workers would return to the labour market in large numbers, and when inflation would start to rise. Since last year, however, they agree that the time has come to stop buying bonds.

The purchases are intended to reduce borrowing costs for businesses and consumers, and to encourage risk-taking by investors. But the impact of the Fed’s asset purchases, and similar efforts undertaken by central banks in Britain and Japan, are highly contentious. Officials and academics disagree about how much, if at all, the purchases have reduced the cost of mortgages and other kinds of consumer and business loans. They also disagree about the consequences. Warnings about inflation proved to be mistaken, but there is concern the purchases have destabilised financial markets.